3 Reasons Why Oil Prices Will Rally Soon

It has been disappointing for the bulls that oil prices have failed to erupt in recent weeks, despite a flurry of positive news, including declining inventories and reports that OPEC + producers have mostly sticking to their promise cuts.

And now the pendulum has swum to the opposite end and oil markets must climb a new wall of concern.

After a brief, half-hearted rally, oil prices fell back to a familiar trading range in the low- $ 40s after the Department of Labor reported that U.S. weekly unemployment claims a total of 1,106 million last week. This comes just a week after the tally plunged below the 1M mark for the first time since March, raising serious doubts about the sustainability of the economic recovery.

“With all the Bullish headlines we’ve seen over the last few weeks about inventories, the inability to break higher does not bode well,” Tariq Zahir, board member of the global macro program at Tyche Capital Advisors LLC, told Bloomberg. “Rau is not breaking on the side and you are in a cash market, so the risk is to the detriment.”

The volatility of oil prices has returned to pre-crisis levels and nothing seems to be putting the markets into action at this point.


Source: CNBC

Here are 3 reasons why oil prices could stay in limbo much longer than the bulls could have hoped.

# 1. Another supply glut

An enormous supply shortage and lack of storage space is the biggest reason why oil prices fell in negative territory for the first time in April. Fortunately, the situation is now much better than it was four months ago, which is why oil prices have recovered nicely.

But here’s the alarming part: Although U.S. oil inventories have declined over the past few weeks, the margin of withdrawal has shrunk considerably.

According to EIA data, US oil inventories refused by 10.6 million barrels in the week ending July 24 and then dropped by 7.4 million barrels, 4.5 million barrels and just 1.6 million barrels in the three consecutive weeks, respectively. There is a real danger that this trend could quickly flip and inventories could start to rise again – a very negative development for oil prices.

These concerns about inventories are not helped by the fact that they have come at a time when OPEC + has demanded its deep production struggle. Earlier this month, OPEC trimmed its historic production growth by about 2 million barrels per day to 7.7 mb / d. But as head of BNP Paribas’ commodity strategy, Harry has Tchilingurian told Bloomberg, there are real concerns that rising OPEC + production could coincide with an uneven recovery in oil demand.

Rystad Energy also has warned that a renewed surplus could beat again after the release of OPEC +’s production cuts:

“OPEC’s experiment to increase production from August onwards could be satisfactory, as we are still not close to the forest in terms of oil demand. The total liquid market will return in a mini-supply gap and a shortage after shortage will only happen until December 2020. ”

Saudi Arabian Energy Minister Prince Abdulaziz bin Salman sought to allay fears that the enlightenment was coming too soon by pointing out that countries that failed to meet their pledges in May and June by cutting production. But we all know that with OPEC + nothing is guaranteed.

# 2. Uncertainty about Covid-19 Many of the recent oil and stock companies can be crowned with optimism that a Covid-19 vaccine will soon become a reality. Indeed, the race to develop an effective vaccine is in full swing: Globally there are 185 research teams engaged in the race to find a vaccine with seven vaccines that have made it to the final stage of large-scale efficiency tests.

Unfortunately, appropriate fax development is usually a very lengthy process with security being given the most priority. For example, a recent vaccine for dengue fever was discovered to actually increase the disease in vaccinated children when they were later exposed to the dengue virus, while another vaccine developed for Respiratory Syncytial Virus caused the same problem. It is the biggest reason why many countries have discounts Russia’s so-called ‘Sputnik moment’. ‘

Related: Saudi oil minister: oil demand could see 97% payback after end-2020

With no clear timelines of when a viable and safe vaccine could hit the mass markets, the world economy and oil markets remain particularly vulnerable to the so-called second wave of Covid-19 infections. Indeed, OPEC + expressed concern that the pace of the oil market’s recovery has been slower than expected due to the growing risks of a longer second wave of the pandemic.

# 3. The tree of renewable energy

When investors think of the oil-renewable nexus, they usually look at it in terms of how low oil prices can slow down the shift to renewable energy. While this is true in principle, so far there is no evidence that low oil prices have negatively affected the momentum of renewable energy. Conversely, the demand for renewable energy has continued to grow during the pandemic at a time when fossil fuels have to deal with their greatest destruction of demand in history.

The continuing wave of massive write-down of assets in the oil and gas sector is a clear indication that exporters have finally acknowledged ‘Lower Forever’ is perhaps the new standard for oil like Shell CEO predicted three years ago.

The bulls, however, could laugh at the latter: Sustainable underinvestment in oil projects could actually lead to an offer squeeze down the line that could spike oil prices.

By Alex Kimani for Oilprice.com

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